Q1 2022 Chegg Inc Earnings Call
[music].
Greetings and welcome to Chegg, Inc. First quarter 2022 earnings conference call.
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Preston and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
I would like to turn the conference over to your host Tracey Ford Vice President of Investor Relations at N E. S. G.
Please go ahead.
Afternoon. Thank you for joining <unk> first quarter 2022 conference call on today's call are Dan Rosensweig, co chairperson, and CEO and Andy Brown, Chief Financial Officer.
A copy of our earnings press release, along with our Investor presentation is available on our Investor Relations website Investor Chegg Dot Com a replay of this call will also be available on our website.
We routinely post information on our website and intend to make important announcements on our media center website at Chegg Dot Com Slash Media Center, we encourage you to make use of these resources.
Before we begin I would like to point out that during the course of this call. We will make forward looking statements regarding future events, including the future financial and operating performance of the company.
These forward looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward looking statements.
We caution you to consider the important factors that could cause actual results to differ materially from those in the forward looking statements in particular, we refer you to the cautionary language included in today's earnings release and the risk factors described in <unk> annual report on Form 10-K filed with the Securities and Exchange Commission on February 22.
<unk> thousand 22, as well as our other filings with the SEC.
Any forward looking statements that we make today are based on assumptions that we believe to be reasonable as of this date.
We undertake no obligation to update these statements as a result of new information or future events.
During this call we will present, both GAAP and non-GAAP financial measures, our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release, and the Investor Slide deck on our IR website investor Chegg Dot com.
We also recommend you review the Investor data sheet, which is also posted on our IR website.
Now I will turn the call over to Dan.
Thank you Tracy and welcome everyone to our Q1 2022 earnings call we.
We started the year with a solid quarter Chegg services grew 14% year over year with $5 4 million subscribers. In addition, we are announcing a new partnership with an independent book reseller, enabling us to continue to offer print and E textbooks to students while our partner handles inventory.
And fulfillment.
We expect this deal to improve our margins and growth rates overtime.
As noted in our fourth quarter call. We entered the year with momentum. However, this trend has not continued at the level we expected.
The issues of enrollment the economy and now inflation have all impacted our industry.
Students continue to take fewer classes and those they do take are often less rigorous with fewer or more limited assignments.
With higher wages and increased cost of living more people are shifting their priorities towards earning over learnings, resulting in a lower course load or delaying enrollment in schools at this time.
In the U S alone, we have seen approximately 1 million students forego or postpone higher education over the last few years.
Impact of these factors is evident in the reduced traffic to higher education support services.
This is made forecasting at this time challenging and while we expect many of these trends to be temporary we are reducing our guidance to better reflect the current market conditions, which Andy will walk you through it.
That being said, we are executing well against these current conditions and indications are that we are outperforming our sector.
With approximately 50% of the world's population under the age of 30 and technology impacting what we learn how we learn where we learn and when we learn the global need for affordable high quality dependable academic support and skills based learning will only grow.
Our goal during this time is to gain greater market share and invest in future growth.
Students, who are using paid support services. This semester are overwhelmingly choosing check.
We are experiencing strong engagement, our highest take rate for the Chegg study pack and outstanding retention rates.
With the increased take rate for the Chegg study pack our continued efforts in the expansion quality discover ability and personalization of our content drove strong retention.
Increase the <unk> of our business.
These are powerful endorsement of the critical role check plays in the lives of students.
We remain bullish on the post pandemic era. So we are staying focused on investments in our future specifically.
Specifically international expansion language learning skills training and supplemental support services like soft skills and financial literacy.
Our reach is expanding globally, and we are improving both our content library and technology platform to increase students ability to discover our more than 100 million pieces of learning materials, thereby improving student outcomes.
<unk>, we continue to be focused on our key priorities, including the student facing launch of University. This fall, which will increase the breadth and quality of our content deepen our relationships with academic institutions and expand the number of students who can learn from check today.
To date professors have uploaded over 140000 approved pieces of instructional content and University will soon be rolling out to faculty and the U K and Canada.
Our international expansion continues to perform well led by the adoption of Chegg study and Chegg study pack and accelerated by the addition of boosted.
We continue to grow our subscribers and take market share and we are now offering local content and user experiences in key markets.
We are currently accepting local currencies in five countries and expect to expand to at least three new markets by the end of the year. In addition, we are price testing in eight countries could determine the optimal price to value equation and we are excited to have recently launched our first fully localized app in Turkey.
Our next localize that will be in Spanish and that will increase our Tam in both the U S and other key countries like Mexico, as well as emerging Latin American markets.
We are also building new b to B channels for both our skills and language services and are pleased with their early success booths, who has direct relationships with over 500 companies and our skills distribution partner Guild now reaches over 4 million frontline workers, which is an important channel project.
We are proud to have graduated our first guild cohorts from our new programs and technology fundamentals and advanced programs like cyber security.
With recent research showing that 82% of global workers polled plan to train a new digital skills in the next five years. We believe these kinds of programs represent a major opportunity for check.
Beyond the academic and professional needs of students there is an enormous opportunity to improve student lives beyond the classroom.
83% of U S students feel they need to learn more about money and finances and half are struggling with their mental health.
Investing in serving these vital student needs and we'll continually work to support them beyond academics and skills.
Given the current environment, we are very proud of how the Chegg team continues to execute we will manage through the volatility and expect a return to higher and more predictable growth over time.
Through all this.
We will never lose sight of our mission to put students first around the world and with that I will turn it over to Andy.
Thanks, Dan and good afternoon, everyone.
Q1 was a solid quarter for check with revenues coming in within the guidance range, while adjusted EBITDA continued to be strong and ahead of our expectations. Despite the volatility on the pandemic and unfavorable education industry trends.
These conditions have made forecasting more challenging in the near term and as a result, we are reducing our full year expectations.
We'll walk you through our updated guidance shortly along with the changes to required materials from our new partnership.
With that backdrop, let me walk you through the Q1 results.
For Q1 total revenue grew to 202 million. This was driven by check services growth of 14% to $185 million as subscribers grew to $5 4 million during the quarter, which included approximately 600000 subscribers from our newly acquired booster serious.
Margin came in slightly higher than expected as we continue to get benefits as we scale.
All of this resulted in adjusted EBITDA margin of 31% or 62 million exceeding our initial estimates even as we made significant investments for future growth.
Looking at the balance sheet, we ended the quarter with $1 6 billion of cash and investments.
During the quarter, we used 422 million to purchase boost two and 300 million for our accelerated share repurchase which was completed in April .
We continue to believe the combination of our operating model balance sheet and cash flows are among the strongest in the education industry and put us in an ideal position to grow organically and should opportunities become available through acquisition.
In early April we entered into an agreement to sell our remaining textbook library.
And to offer both physical and digital textbooks through a partner, where we will receive a single digit percentage Commission.
Being student first we've continued to offer textbooks, even as it stopped contributing positively to our financials.
This new relationship gives us the opportunity to continue to serve students and ultimately grow faster with higher margins we.
We have provided detailed in our earnings deck on the Investor Relations website regarding the transition.
Including the impact of both revenues and costs.
Starting in 2023, we expect this partnership will contribute approximately $7 million to $10 million in annual revenue.
Which given its size will be consolidated into Chegg services revenue and as such we will only report a single revenue line.
Moving onto guidance as we continue to navigate the evolving impacts of the economy and the pandemic the historical patterns of our business, including seasonality and the interest semester student behavior have changed.
While these factors have made forecasting more complicated we believe over time, it will return to greater predictability.
As a result, the 2022 we now expect total revenue to be between 740 $770 million.
Chegg services revenue between 710 and $740 million.
Gross margin between 73, and 74% and adjusted EBITDA between 220, 235 million or 30% adjusted EBITDA margin.
For Q2, we now expect total revenue to be between 188 and $192 million with Chegg services revenue between 183 and $187 million gross margin between 76, and 77% and adjusted EBITDA between 66 and $68 million.
In closing this.
Spike the turbulence in the industry, we continue to invest prudently in growth such as international expansion.
University.
<unk>, expanding our non academic and skilled offerings and language learning with do Sue.
All while delivering best in class margins and generating significant cash flows along with the strength of our balance sheet. We believe this puts us in pole position when the industry headwinds subside.
With that I'll turn the call over to the operator for your questions.
Thank you very much.
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One moment please poll for questions.
We have our first question from the line of Doug Anmuth with J P. Morgan. Please go ahead.
Hey, it's Bryan Smith on for Doug. Thank you for taking my questions just two here.
So how do you think about business specific levers that shaken pulled to help fast and the pace of recovery and how does the slowdown compared to trends seen during times of economic slowdown and inflation in the past.
And then just finally is it slow down more broad based across the us and international there's outsized domestically. Thank you.
Yeah. This is Dan.
There have been challenges sort of globally for different reasons.
Obviously, though the war has affected parts of Europe , and Covid believe it or not as affected parts of Asia. So those or are there are different variables. There. There's just a lot of variables out of the control of companies right now and.
From the U S perspective.
Best thing to do inside the U S is to gain market share, which we believe were doing to grow the international business faster, which we are investing in.
The acceleration of our skills business. So we're investing in a lot of smart things that we think will return the company to much more significant growth as early as next year, but we just have to fight through the realities of all the variables that are affecting hours in other businesses, but in higher education. Historically, I mean look we haven't seen.
This kind of inflation in a long time, it's hard to measure it versus anything that's happened in the past, but what with wage inflation.
And people paying a lot for people to switch jobs quickly or to work more hours versus going to school you just see a lot of that portion of higher education leaf and they will come back are they generally education goes up during recessions and it goes down during strong economic markets.
So this is a temporary situation in the U S and we just have to fight through it we're extraordinarily proud of the fact there.
We still expect to grow this year on the top line.
We're profitable we produced free cash flow our guidance, we just thought it was prudent to adjust it by 7%.
And.
We just think Thats a smarter decision at this point in time, given the fact that every time, we turnaround is a new variable out of our control, but the overall core business is growing it's profitable. It produces great free cash flow, we see great growth coming from outside the U S. In the future. The addition to boost here, we're super excited about and our skills business is beginning to gain real traction with that.
Our partnership with guilds. So we have a lot to look forward to just got to get through this moment in time.
Thanks for taking my question.
Thank you.
Next question from the line of Jeff Silber with BMO capital markets. Please go ahead.
Thanks, So much forgive me I'm, just trying to get a better understanding of what's going on so if I remember correctly on your October call you talked about the issue of a fewer students than and less rigorous students on our call in February most of that at least the less rigorous parts seem to be behind you.
We are two months later in that back.
What's changed to make this so volatile over the past six months or so and why do you think this is just a transitory issue.
Well you know nobody wants to say transitory now that we've understood the way they purchase.
Talked about inflation.
What's changed is the things that we put in the prepared remarks, which is inflation has really reward at the same time that salary inflation has happened which has taken a lot of people from the four year schools, which people are not likely to graduate from any way and are taking classes and community college students to choose.
Used to shift even more aggressively towards earning right now and you really shouldn't blame them right. It's a smart prudent business decision for them at this moment, which is if their salaries are doubled and tripled.
Why not take that money and get more hours and take fewer classes are no classes that is absolutely representative and every data point that you can find in the higher education market and the ones that we share today as examples and you can look at all of the higher education sites at students go to normally for help we're actually gaining market share against them, but they're all down these are.
Macro situations. So what's changed is we did see significant come back as we got towards Midterms and finals and as we said in the prepared remarks. It didnt sustained itself meeting when we came back from the new year. It originally started off very strong and then you saw inflation come in.
And then you saw wages go up further and you saw the demand of people trying to solve the supply chain issues. That's a large portion of chegg audience.
To all of our audience, obviously, we're still growing I mean, we did grow 14% in the first quarter of the year. So all is not lost it's just simply a moment in time that is just some of the variables are out of our control and very volatile every industry has something whether it's china or supply chain or some other variables. These are ours.
Okay that was really helpful. I really do appreciate that Dan and then as my follow up question. If I look at your subscriber numbers. So if we take out the boost your numbers. It looks like subscribers were flat on a year over year basis can we bifurcate that between the U S and international I'm, assuming international is growing in the U S is falling.
Is that correct and is that something we should expect to continue and when do you think U S subscriber growth will start again.
Yeah, I'll start it and let Andy finish switches, we sort of looked at it the other way, which is actually subscriber growth in Q1 is up over subscriber growth for Q4, not including boost too.
So we state we see ourselves rather than at the moment looking at the year to year.
Comparisons because of both the Covid era as well as these other variables that we're talking about where we're trying to do is figure out where that momentum returns at a significant inflection point where.
We are pleased that Q1 has higher subscribers.
During Q4, and then of course, it you'll add on boots, who abuse, who is growing so I at.
At the moment, if you look at it year over year. The U S market is the one that declined the most because that's where the million plus students left the market.
And Chegg you know we have very good penetration. So that that's you know hundreds and hundreds and hundreds of thousands of subscribers that we otherwise would have gotten had they been participating in higher education market. So so at the moment. We're just looking at Q1 grew faster grew more than Q4, then you add on boost too now as to when we expect it look.
Clearly forecasting has got something that is easy to do right now and that's why you know two of the last three quarters you know we're having these conversations.
But.
Our expectation is given when you lap COVID-19 and lap all these things that 'twenty three will be a much better year, but I'll, let Andy.
I'll talk to that.
No I think I think you got it Dan.
And to Dan's point, you know we were somewhat north of 100000 more subscribers in Q Q1 than we were in Q4, and we look at that as good news and to Dan's point, I think where you know I think hopefully by the time, we get to 20 threep as there's more predictability.
And and high growth, but where we're just at a point in time as Dan mentioned.
Okay, great. Thanks, so much.
Thank you we have next question from the line of Stephen Sheldon with William Blair. Please go ahead.
Hey, thanks.
Can you just talk some about the competitive environment I guess have you seen anything change there as you look back over the last few quarters for your core solutions and how confident are you that the slowdown you're seeing is due to industry headwinds versus either you know, we're just competitors gaining traction with with higher education students.
Yeah look we're in a we're in a unique position which is.
Despite all this tumbled.
We're still the only company in our sector that is profitable and has cash I'm producing free cash flow and frankly grew 14% in the first quarter.
So we.
We sit at a position that allows us to see a lot of the industry in ways that others can't.
We also as you can imagine there's.
Theres a lots of folks in our industry who are struggling.
Struggling and.
You can see that in a few public companies, but we get a chance to get inside the company to have a lot of private companies for reasons that you can imagine as we survey the landscape.
There is no competitor that we have seen and we have seen most of them that is gaining any traction on us. This is not chegg, losing share. We believe actually chegg is gaining share and as simple as statistics that you can all look at is just looking at and it'll be on our website the traffic side that shows one.
But our traffic.
During this period to what others have done and you can see that the others have declined significantly more so.
So no I don't think it's a competitive issue and of course, it's the first thing we check we look at our own execution, we look at our own operations at the top of the funnel issue in the U S and it's a pricing opportunity outside the U S. All things that we're working on so.
We wish we weren't in this situation we didn't cause this situation we have to deal with this situation and we are but again the company grew 14% and.
On top of that we continue to produce profits and profitability and gets stronger as an entity.
And will emerge from this even stronger because we have greater resources than any of our competitors do and so we have the opportunity to continue to invest in future growth like skills like the international business. So.
Again, not a place that we enjoy being but we're going to leverage the advantages we have and continue to distance ourselves from our competitors not the other way around.
Great. Thank you.
Yes.
Thank you we have next question from the line of Ryan Macdonald from Needham. Please go ahead.
Alright, Thanks for taking my question, Dan sorry to.
Harping on the subscriber counts, but so as you look at fourth quarter to first quarter. You were up you know minus boosts here, but I think 132000.
Subscribers sequentially as we think about domestic versus international you know you showed pretty strong growth internationally is it safe to say that those rates kept up in in first quarter over fourth quarter and that the majority of those losses were domestically I'm. Just curious if you can give us any more color I guess on that sequential.
The increase you know what the moving parts were there.
Yeah look I think if you were or were not going to give out the specific numbers for obvious reasons, but what I would say is that the U S market is challenged more than the international markets. The international market as you're continuing to see really strong growth. The U S markets are seeing.
Headwinds as it relates to subscriber growth, but positive growth in terms of revenue and and ARPA, which is something that we talked a lot about which is the acceleration of our audience is taking chegg study pack over check so in the short term, we're focused on increasing the revenue and the ARPA of the U S market.
Until it comes back are outside the U S. We're focused on growth subscriber growth. So I would look at it in all the different angles, including subscriber growth, but for US it's revenue and <unk> growth in the U S is our focus in the short term, while subscriber market share growth outside the U S. So hopefully that clarifies.
Yeah, great. Thanks for the color there shifting to boost too.
Obviously, great to see the business sort of fully integrated now and that sort of now starting to contribute to the subscriber side of things as you look at our you know the integrating those businesses from a go to market perspective or marketing to that existing base.
Are you changing thoughts at all about how you're focused on sort of increasing sort of boost she was brand presence or awareness within the core chegg subscriber base. Thanks.
Yes, so we're accelerating our efforts look Bruce who is a very good company and it's growing at a very good rate. It's got a very good management team and our vision always was to continue to invest in it outside the U S and continue on its growth path, which has been very strong but bring it into the <unk>.
U S and bring it into the U S through our audience. Initially so we know there are 55% of the our U S audience wants or needs to take a language. We also know that they don't know the name of boost so it's like 3%.
So we have very aggressive ambitions for the rest of this year to get the name recognition up because you know everybody knows the other language companies, which are are good companies, but our audience should know Oslo, and therefore should buy booths, who and interestingly enough. When our audience is survey the number one thing that they wanted.
It was actually to speak to local language speakers and that's the one thing that Bruce who has that the other competitors don't have so we're gonna be obviously advocating for boosting to our audience and the differentiation.
And and we're seeing early signs of success, but you know we only closed January 13th it's very early.
But we bought it for the right. We believe for the right reasons and we think we're going to continue to see really good growth in that company and then profitability from that company next year. So chegg is going to be even more profitable next year than this year simply through the investments we're making so.
I'm pretty excited about that.
Thanks very much.
Yeah.
Thank you we have next question from the line of Brent Thill with Jefferies. Please go ahead.
Good afternoon, Dan I, just wanted to see if we can compare and contrast, the fall to spring and I think in the in the fall you had a late start but it kind of came through in the spring did you. It's kind of you know me.
In terms of finals has now settled in D E.
I just wanted to compare if you can paint a picture what what what you've seen with the main differences that that happened you know spring versus versus fall.
Well.
We actually had a very good first quarter.
What we're really talking about here is.
Our outlook for the rest of the year.
So.
Overall, we're really pleased with the first quarter and it was pretty close to our expectations. A couple of million dollars off maybe on the Chegg services side and some of that was not the subscriber business is something that was the AD business and some.
Some of the other smaller pieces of it the subscriber business would actually get really did well in the first quarter. It's really just the play through expectations of continuing to see muted attendance at college and muted.
<unk> focus on academic rigor right now so we're just trying to be more prudent about the second half of the year based on new information, we see which is the whole purpose of these earnings calls which is to share. The changes we see in the market. So I would say that we saw really good end of Q4 that rolled over really strongly.
Into Q1, which is when we gave our report in February now as we look out and we add things alike.
Inflation.
And then wage inflation are we.
Just we we just think the second half of year, we just wanted to be more prudent. So it's a 7% change it's not a 25 per cent change. So it is we think we're in the ballpark of the things that makes sense at this point in time, we're preparing ourselves to be to you know go back.
Two high growth or high much higher growth when the market opportunity presents itself and will even be more profitable as a company that and so I think we're doing the right things at the right time, we just cannot change the macro condition right now in higher education, and if you look what's going on with all the conversations about all the different variables and government all these things.
It's a complicated time for higher education, we're there to support the students and the students that are in the system Love us and are using us and they're using as an extraordinarily high rate high retention low cancel high engagement a higher take rate for Chegg study pack great renewals I mean, all the things you know archon.
Troll are doing really well, we need a we need the top of the funnel in the U S to come back a little bit and it will and then outside the U S. We're seeing great growth.
I think that's maybe when investors are trying to grapple with right. Now are you seeing churn rates go higher or are you just making the assumption that the macros getting.
Harder or you haven't seen it yet and you're just implying in the guide a tougher macro but you haven't seen it that that's what I think everyone's trying to yes, no I look I understand.
And that question it's fair.
You know, we we try to approach these things with with all the facts that we have is the day, we need to report and we think it's the number two not number one.
So the course right now.
Churn has not gone higher asps.
No not.
The other way around.
Absolutely not it's gone the other way around retention is near record rates.
Cancels are near the reduction of cancels as near record rates. That's like I said the things in our control are performing extraordinarily well. Once you are in the funnel conversions all of those things really really really really strong. This is a return we need it to return to the top of the funnel not what happens in the funnel.
Once students come onto Chegg, they stay on the Chegg. They stayed the length of time, they've been staying and again if you want the single Best example of that it's the take rates of Chegg study pack being so far ahead of what we ever imagined.
That you know we're in a situation where that just shows that the power and the importance of chegg to the students actually want more of US just need more U S. Students in while the while the international business continues to grow.
Does that answer it clearly.
That was clear thanks, Okay. Thank you for asking the question that way I appreciate it.
Thank you we have next question from the line of Josh <unk> with Morgan Stanley . Please go ahead.
Yeah.
Thanks for the question most of mine were already asked so I just wanted to clarify a few things that you were saying hopefully we get a little more context on so on the Chegg study pack take rates being you know well above expectations anymore any context that you can provide as far as where they are.
Today and.
You know, where where you'd expect them to go.
Yeah.
Yeah.
Yeah.
We are.
The take rate for Chegg study since we launched it has doubled.
So we don't want to give away the exact percentages because things can fluctuate in a given quarter and as we grow countries internationally. The overall number may may change a little bit and it seems like every little number that is slightly off from what we thought affects things, but it is twice what we thought it would be and it is holding up at those rates and its renewing at really high.
High rates and it is both U S and international.
So that is why youre seeing really great increase in our pool each quarter for Chegg study.
Okay, Great and then on <unk> just wanted to check in on how it actually performed so.
So far the.
The contribution from boost during the quarter and what you were thinking for the year.
Yeah, Yeah. So yeah, Josh good question, so boosters performing exactly as we would have at least within the range of what we thought at the beginning of the year.
Doing really well and as you know they're there they're business is a combination of both b to C and b to B. The B to B is clearly growing faster and we knew that going in that but.
But yeah. It are performing as we'd expected in Q1 came in right in line with what we expected the postal clubs on January 13th.
Yeah.
Okay got it thank you.
Thank you we have next question from the line of Jason <unk> with Keybanc capital markets. Please go ahead.
Great. Thanks for taking my questions I did want to ask about international some of the prepared remarks, you mentioned that you're currently offering localized content and user experiences in several countries any other.
Details on what those countries are and maybe it did those launches coincide with the start of the school years.
Well no I mean, some of them did not coincide with the start of fiscal years. So they will be more effective over time.
So that's an excellent point, but the countries that we have local pricing and now for example are Canada, Australia, UK, Turkey, Mexico.
We are we're.
We're testing pricing in eight countries right now and in those countries. They're a combination of what you'd imagine which is ones that are very focused on tech and stem like Hong Kong and really huge.
Countries in terms of population, where we're seeing very high top of the funnel, but not really good conversion because of the pricing.
And those countries include all these places, India, Indonesia, Mexico, and places like Philippines, and Malaysia, South Africa. These are places where.
There, we seem to be attracting a lot of audience in the conversion isn't what we would want it for it yet and that is for obvious reasons, which is charging U S prices in those countries.
It's not going to yield a great result, but we've known that but now we've got the technological capability to change it, especially we have the price testing in those eight countries. As an example are also in the prepared remarks. They may have been missed which was.
We have our first fully localized app, which is in Turkey, Turkey has been a really great contributor for us and Ah. They have they've wanted to local app and the local language and the next one will be in Spanish, which will be relevant in Mexico, Latin America, and believe it or not the U S. So those are all really.
Exciting opportunities for us and were investing in me now.
Okay perfect no. That's very helpful color. Thanks, Tien and then Andy one quick one on the EBITDA margin guidance by kind of exiting the textbook business I would have thought the margin would have gone up a little bit better.
Is it just timing related from from when a related to that or I guess other investments youre, making.
No. It is timing I think youll see the full power of us getting out of textbook starting in next year.
I think you'll see that overall revenue growth real growth rates increase and EBITDA margins increase over time, we're kind of in a transitional period right now.
As you can see and in fact, if you.
Do you need any more details on what's involved I think it's I think it's slide 12 on the Investor Relations website for those post chiming in so you know what I find it.
But yeah. It is but all the time clearly we will see higher margins as a result of the exit of tech, but not the exit of textbooks, but moving to this model on textbooks.
I also perfect. Thank you were just to note I actually I think it's just important to note that if.
If you remember that we said when we acquired lucid the booths, who was going to lose about $18 billion. This year.
It'd be approaching breakeven next year.
We're on a path to do that and our skills businesses, moving increasingly faster and faster towards profitability. So.
Our margins will continue to improve.
Over the next couple of years and add that to textbooks. So we're really excited about that we just have great leverage in the model.
Yeah.
Thank you we have next question from the lineup Alex Furman.
With Craig Hallum Capital Group. Please go ahead.
Great. Thanks, very much for taking my question I wanted to ask a little bit about how inflation is impacting your business seems seems to make a lot of sense that you know if wages are going up that that impacts the learn versus earn equation. So not you know perhaps surprising that more of your students are spending more time in in the workforce.
And and not taking as many classes are or perhaps not taking any classes, but I'm curious if you're seeing any impact from inflation as it relates to just students budgets and price sensitivity has there been any sensitivity to price I'm curious if perhaps you've seen any of your users maybe maybe trading back down from the chair.
Study pack to just the regular Chegg study membership.
Weirdly in that look it's a very fair question.
And.
We are a must have for students that are taking their academic seriously.
You would imagine that that would be a scenario and we looked at that scenario, but frankly, it's gone the other way, which is an increasing percentage of people are taking the chegg study pack. So they're actually paying 1995 versus 14 95. So of those that are that are focusing on their academic this semester. They overwhelmingly as it paid search.
This use chegg.
And if those that are doing it we're seeing extraordinarily high take rates are that it seem to be sustaining themselves over the period of time. So I think what's happening is the first part of your description is what we see choices to take fewer classes or or wait to take classes that has seen significantly.
Both community colleges and online schools and there are four year schools, where students take courses, but don't but aren't on a path to graduate in four years, if they're on a path to graduate.
And those are the kinds of folks that are making those choices within the spending.
Do imagine, they're making other choices with their money theyre not cutting check because of that.
Okay. That's really helpful. Thank you.
Yep.
Thank you.
We have next question from the line of Brian Peterson with Raymond James. Please go ahead.
Hi, This is jessica onto Brian I, just had a quick question about the progress with your bursty.
You've been talking about all of them getting really great with faculty I'm, just curious about how that product has been on its rollout with dot com site.
To that end market and then also a quick follow up what kind of feedback have you been receiving from content creator and other early users. Thanks.
Yeah. No fair question, you were just a little bit early on the timing because we are still acquiring the content now we have not rolled it out to the students in a full matter yet or it actually in a matter at all except for testing.
We are way ahead.
In terms of the amount of content. They professors are offering way ahead.
So there seems to be an incredible desire for professors to support chegg and helping students learn better through the higher quality content and so from a professor standpoint, it's been phenomenal. The expectation is that we will be rolling out to use your facing later on this year in between those.
Time, what we're doing with students as we're testing the quality of the content from a zero to five scale and we chose the words carefully there to say that this was the approved content.
Approved professors and on average those are scoring between four six and four seven out of five so there seems to be real noticeable quality in the minds of the students that are part of the test groups, but the actual second side of the marketplace hasnt rolled out yet.
Okay. Thank you.
Yep. Thank you. We have next question from the line up I've entered <unk> with Piper Sandler. Please go ahead.
Uh huh.
My question.
Just wanted to go back to comment you made earlier that you know the kind of.
So basically the visibility is a it's kind of you know I'm.
I'm not very good and it's difficult to do kind of kind of forecast and you know I just wanted to make sure I just clarify you know.
That's what do you what do you mean, because if it's difficult to forecast for you guys and then how do we forecast sort of sitting externally, but but maybe that's not what you meant when you when you said it.
I'm not sure what they're what I.
I might not understand the question well, let me tell you what we said no I havent used it.
And one of the earlier Q&A sessions, you said you now are.
Kind of basically forecasting is is Oh, you know, it's it's kind of difficult to forecast. It. These are you know.
Kind of the top of the funnel movement.
And I just wanted to.
Kind of double click on what what do you mean by that like is it is forecasting really difficult in this.
Just went to the top of the funnel movement.
Yeah look.
Inside the inside the funnel.
We are seeing near.
Record numbers, if not record numbers for all the things that once a student as yet.
That's.
Easy to forecast, where it's hard to forecast as particularly in the U S. And then when Covid closes down places in Asia.
And other things like that it's hard to know those things and.
And then the as Andy mentioned in his prepared remarks, the inter quarter behavior of Wednesday, when schools start and when they offer midterms and when they're doing finals. All those variables are affected by a whole host of things that really have not affected higher education until COVID-19.
And so now where we're.
Sort of.
Working through what those changes are.
And so that changes a little bit of the timing of when people come in and some quarters are coming in earlier than we thought which is good news and other quarters are coming in later than we thought. So these are just all variables that affect our ability to forecast and you.
You know we wanted to give a 2022 guidance and we did and we just wanted to put it more in line with things that we're concerned with but have yet to happen in the second half of the year.
Okay. It was a question earlier, which is are we seeing it. The answer is we're not seeing any erosion in any of the things that we can control, we're seeing really great results.
Results from those were just imagining the second half of the year. Given every one of these variables and then the election is coming up there's just there's so many things going on that may affect the day to day lives of students and the choices. They made that had just gotten checks control at the moment that's all.
Great. That's helpful. Thanks for clarifying that and then just very quickly on the free cash flow Guide I know you provided on free cash flow guidance when you provided guidance.
How should we think of free cash flow guidance, just given the revised.
Everybody's numbers.
Yeah, well, we we haven't changed our free cash flow guide and we've said for many years quite frankly, it's in that 50% to 60% range. We are.
A little higher than that last year for a variety of reasons, but but yeah. We we we would expect to be in that range.
Okay perfect. Thank you.
Thank you we have next question from the lineup of Alex Paris with Barrington Research. Please go ahead.
Hey, guys. Thanks for taking my question most have been asked and answered, but I'm looking at slide 12 for the required materials transition and just so I understand it.
And then and then looking at the guidance and the implied guidance required materials produced revenue of a little over $17 million in the first quarter. It looks like mid point of guidance suggest 5 million in the second quarter and less than $8 million in the second half. So a total of $30 million for the full year.
DVA has taken over text print textbook first but E textbook not till later this year. So what is the $5 million in revenue is that that single digit commission percentage in the second quarter.
Yeah, well, yeah, there's a couple of things and it is a little it is a little crazy I'll walk a doodle as I will call. It a with respect to required materials. This year. It's a combination of things. We still have we have some of the deferred revenue from the E textbooks that rolled through into Q2, we do get a small amount of commission.
Because as you know Alex a textbook sounds very large in Q2, and then as we roll into the second half of the year all of well actually all of them are physical textbooks are now on that.
That percentage and then towards the latter part of the year.
Textbooks will so it is a little.
Like I said, a little while could do it but but once we get through to.
2023, we expect it to be it will be 100% that way and it'll be in that call it about $7 million to $10 million range.
Range, depending upon the you know the volumes of textbooks.
Alright, and then my follow up would be and then for the full year of $30 million in revenue are down from previous implied guidance of $60 million, but the transition is here.
And then next year $7 million to $10 million of high margin revenue as a result of the transition.
Yeah, it's very it's very high margin.
You go to this once again to the slide 10, it's a it's a very different construct from when we had the last commission business with Ingram right.
We would do it and one more thing during that we were setting the catalog with doing the pricing we're doing the marketing we're doing the customer support we're doing none of that at this time.
That's all being done by our partners. So it's really kind of black Knight.
Yeah, Hi, Mark just high gross margin.
To your point.
Yeah, not non model perspective.
We want to offer.
Textbook rentals to students because her check not invented it.
Publishers would still be taking advantage of students at a very significant way.
<unk> 25 per cent of tuition when we first started.
What's the cost of textbooks, which is ridiculous and unfair. So we invented that model and we said way back then that we were going to convert the company from a textbook rental company to a pure digital company.
So series of support services for students on a global basis, and that's what we've done and.
Just as we think back through this when we went public eight years ago, we had about $20 million in digital revenue.
And now we're talking about three quarters of $1 billion.
And these businesses over the last eight years. So we're very excited about what we're doing but the textbook business, we want to continue to make it available to students.
As a service to them not as something that represents any real value to us as a company anymore in terms of either revenue or profits, but it will be higher margin business and none of the issues that we had to deal with in the past. So this is sort of our exit strategy from a business that has been declining for the last couple of years. So once.
It's done it becomes a fixed number small percentage of our overall revenue our growth rates go higher and we're excited about entering that next phase.
Great well. Thank you both I appreciate that additional color.
Yeah. Thanks for the question.
Thank you ladies and gentlemen, we have reached the end of the question and answer session and I'd like to turn the call back to Dan Rosensweig, Chairman and CEO for closing remarks, how about you Sir.
Thanks, everybody.
It's been a complicated year for people to run companies for.
For you guys to forecast companies, we appreciate how hard you've been working.
Along with us to figure these things out the good news about check is the upside it is still quite significant.
International growth the skills growth the movement from Chegg study Chegg study pack and the increase in <unk> that we have a lot of growth vectors ahead of US. This is just gonna be a difficult transition year versus.
You know what we'd all would've hoped but the good news is our adjustment is simply the macro conditions not anything that we're seeing at the moment.
And it's only a small change in the guidance and I was just trying to be prudent with what we see and what we feel going on in the current market, but the future of Chegg is gonna be huge and we're excited and we're just appreciate you all joining us. Thank you.
Oh and also I want to congratulate Andy who became a grandfather this morning.
So one more future check customer to put into the subscriber base.
Thanks to everybody talk to you soon.
Thank you very much.
Ladies and gentlemen. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.
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